Fed's Lacker Says Economic Risks Are 'Balanced'

The risks posed by the credit market turmoil and inflation were about balanced, and there was some improvement in inflation, Federal Reserve Bank of Richmond President Jeffrey Lacker said on Wednesday.

"I think we have the balance about right, right now," he told reporters after a speech to the International Association of Credit Portfolio Managers.

"There are some improvements in inflation but I still have some concerns" about inflation pressures, he said.

He also said he was "comfortable" with how financial markets are functioning.

While not a voting member of the Fed's rate-setting committee this year, Lacker said he supported the central bank's decision to cut rates in October, which had one dissenting vote.

"I supported the reduction, because I thought a slightly lower rate was warranted."

He acknowledged views were split on whether to keep rates steady or to lower them, saying: "There were good arguments on both sides."

Lacker made a name for himself as an inflation hawk when he dissented four times in policy meetings last year in favor of higher rates while a voter on the Fed's interest rate setting committee.

In his speech, Lacker said assessing the credit market turmoil that started this summer may take more time and that the Fed did the right thing in making funds available, albeit at a cost.

"It may be some time before we have a full understanding of this summer's events," he said, referring to a seizing up in credit markets stemming from losses in the U.S. mortgage market.

"My reading of the evidence is that the episode was less about liquidity than it was simply about a dramatic change in the valuation of a class of credit exposures," he added.

The Fed initially responded to the credit crisis by providing ample liquidity to markets and cutting the discount rate to make it easier for banks to tap funds directly from the Fed.

The Fed ultimately cut the benchmark federal funds rate by a cumulative three quarters of a percentage point in September and October to offset potential economic fallout from the market turmoil.

The fed funds rate is now at 4.50 percent while the discount rate is 5 percent.

On the Fed's response to the credit market turmoil, Lacker said: "We stood ready to lend -- on good collateral at a penalty rate -- but did not interfere with the market's assessment of risks."

"So I think there's a good chance that, when all is said and done, we will be able to say that the Fed did the right thing." The Fed's next monetary policy meeting is on Dec. 11.